Viability of IP Structures with Russia Reconfirmed

The Seventeenth Arbitration Court of Appeal confirmed the position of the first-instance court regarding the "Monetka" case on 19 January 2012. This case is attracting the attention of tax advisors since the beginning in 2010 and then after the Ural District Federal Arbitration Court pushed it back for a new hearing on June 30 2011. The "Monetka" case is remarkable for the detailed analysis of back-to-back royalty scheme involving an IP company registered in Cyprus and a Russian licensee. Taxand Cyprus discusses the Monetka case and the potential repercussions for multinationals with interests in Cyprus and Russia.

The main argument of the Russian tax authorities was to convince the courts that the taxpayer (licensee) used conduit arrangements that solely aimed at obtaining tax benefits. To support its claim for a sham structure, the tax officials pointed out the fact that the licensor and the licensee are related parties, that there are too obvious coincidences and a step-by-step plan implemented for the transfer of IP rights and that the transactions lack economic substance.

Taxand's Take

This decision provides substantial relief to participants in similar structures, a great majority of whom involve Cyprus IP companies, as the careful structuring of the ownership of IP and routing license payments through a Cyprus company can lead to major tax benefits. However, the fact that on the next day following the delivery of the decision, charges were pressed for violating the Labor Code, shows the determination of the Tax Authorities and how aggressive they can become when it comes to tax collections. There has been a recent trend for tax authorities to attack common IP structures and the need to make IP structures more sophisticated is vital. Taxpayers should not be appeased by the result of this decision, but on the contrary, they should revisit their existing IP structures and add substance.